Attached files
file | filename |
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8-K/A - FORM 8-K/A - Enstar Group LTD | w84414e8vkza.htm |
EX-99.2 - EX-99.2 - Enstar Group LTD | w84414exv99w2.htm |
EX-23.1 - EX-23.1 - Enstar Group LTD | w84414exv23w1.htm |
EX-99.3 - EX-99.3 - Enstar Group LTD | w84414exv99w3.htm |
Exhibit 99.1
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2010 and 2009
(With Independent Auditors Report Thereon)
KPMG LLP
345 Park Avenue
New York, NY 10154
345 Park Avenue
New York, NY 10154
Independent Auditors Report
The Board of Directors and Shareholder
Clarendon National Insurance Company and subsidiaries:
Clarendon National Insurance Company and subsidiaries:
We have audited the accompanying consolidated balance sheets of Clarendon National Insurance
Company and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, stockholders deficit, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Clarendon National Insurance Company and subsidiaries
as December 31, 2010 and 2009, and the results of their operations and their cash flows for the
years that ended in conformity with U.S. generally accepted accounting principles.
September 20, 2011
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(KPMG International), a Swiss entity.
the U.S. member firm of KPMG International Cooperative
(KPMG International), a Swiss entity.
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2010 and 2009
(In thousands, except share data)
2010 | 2009 | |||||||
Assets |
||||||||
Fixed maturities, trading, at fair value |
$ | 644,409 | 599,113 | |||||
Preferred stock, trading, at fair value |
4,824 | 4,075 | ||||||
Short-term investments, at cost which approximates fair value |
198,750 | 131,753 | ||||||
Cash and cash equivalents |
6,470 | 20,197 | ||||||
Agent balances receivable |
| 1,017 | ||||||
Reinsurance recoverable on paid losses and loss adjustment expenses |
17,427 | 56,682 | ||||||
Reinsurance recoverable on unpaid losses and loss
adjustment expenses |
1,246,839 | 1,683,931 | ||||||
Interest income due and accrued |
4,342 | 5,410 | ||||||
Federal income tax receivable from Parent |
417 | | ||||||
Receivable from parent and affiliates |
443 | | ||||||
Fixed assets, net |
5,309 | 5,269 | ||||||
Other assets |
19,186 | 22,415 | ||||||
Total assets |
$ | 2,148,416 | 2,529,862 | |||||
Liabilities and Stockholders Deficit |
||||||||
Liabilities: |
||||||||
Unpaid losses and loss adjustment expenses |
$ | 1,788,160 | 2,028,337 | |||||
Reinsurance payable on paid losses and loss adjustment expenses |
3,677 | 22,838 | ||||||
Commissions payable and contingent commissions |
2,794 | 6,708 | ||||||
Accrued interest on surplus notes |
52,330 | 45,237 | ||||||
Accrued expenses |
12,348 | 13,374 | ||||||
Unearned premium reserve |
144 | 833 | ||||||
Ceded reinsurance premiums payable |
20,637 | 26,735 | ||||||
Deferred gain on retroactive reinsurance |
| 205,176 | ||||||
Funds withheld under reinsurance treaties |
21,043 | 100,499 | ||||||
Amounts withheld or retained by the company for
the account of others |
1,139 | 1,986 | ||||||
Federal income tax payable to parent |
| 437 | ||||||
Payable to parent and affiliates |
| 467 | ||||||
Surplus notes |
282,563 | 282,563 | ||||||
Other liabilities |
4,038 | 13,505 | ||||||
Total liabilities |
2,188,873 | 2,748,695 | ||||||
Stockholders deficit: |
||||||||
Common stock, $100 par value. Authorized 50,000
shares; issued and outstanding 48,000 shares |
4,800 | 4,800 | ||||||
Additional paid-in capital |
401,235 | 401,235 | ||||||
Accumulated deficit |
(446,492 | ) | (624,868 | ) | ||||
Total stockholders deficit |
(40,457 | ) | (218,833 | ) | ||||
Total liabilities and stockholders deficit |
$ | 2,148,416 | 2,529,862 | |||||
See accompanying notes to consolidated financial statements.
2
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2010 and 2009
(In thousands)
2010 | 2009 | |||||||
Revenues: |
||||||||
Net premiums written |
$ | (5,779 | ) | (740 | ) | |||
Decrease in unearned premium reserve |
43 | 382 | ||||||
Net premiums earned |
(5,736 | ) | (358 | ) | ||||
Net investment income |
16,539 | 16,774 | ||||||
Net realized and unrealized investment gain |
13,254 | 4,515 | ||||||
Interest expense on funds held |
(60 | ) | (1,767 | ) | ||||
Net investment gain |
29,733 | 19,522 | ||||||
Total revenues |
23,997 | 19,164 | ||||||
Expenses: |
||||||||
Net losses and loss adjustment expenses |
20,360 | 33,068 | ||||||
Amortization of deferred gain on retroactive reinsurance |
(205,176 | ) | (40,117 | ) | ||||
Total losses and loss adjustment expenses incurred |
(184,816 | ) | (7,049 | ) | ||||
Operating costs, commissions and other underwriting
expenses incurred |
22,427 | 27,614 | ||||||
Other expenses, net |
7,880 | 10,922 | ||||||
Total expenses |
(154,509 | ) | 31,487 | |||||
Income (loss) before federal income taxes |
178,506 | (12,323 | ) | |||||
Federal income tax expense |
130 | 67 | ||||||
Net income (loss) |
$ | 178,376 | (12,390 | ) | ||||
See accompanying notes to consolidated financial statements.
3
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders Deficit
Years ended December 31, 2010 and 2009
(In thousands)
Accumulated | ||||||||||||||||||||
Additional | other | |||||||||||||||||||
Common | paid-in | comprehensive | Accumulated | |||||||||||||||||
stock | capital | income (loss) | deficit | Total | ||||||||||||||||
Balance, December 31, 2008 |
$ | 4,800 | 401,235 | | (612,478 | ) | (206,443 | ) | ||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net loss |
| | | (12,390 | ) | (12,390 | ) | |||||||||||||
Balance, December 31, 2009 |
4,800 | 401,235 | | (624,868 | ) | (218,833 | ) | |||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net income |
| | | 178,376 | 178,376 | |||||||||||||||
Balance, December 31, 2010 |
$ | 4,800 | 401,235 | | (446,492 | ) | (40,457 | ) | ||||||||||||
See accompanying notes to consolidated financial statements.
4
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2010 and 2009
(In thousands)
2010 | 2009 | |||||||
Cash from (used in) operating activities: |
||||||||
Net income (loss) |
$ | 178,376 | (12,390 | ) | ||||
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
||||||||
Realized investment gains |
(13,254 | ) | (4,515 | ) | ||||
Depreciation of fixed assets |
1,588 | 828 | ||||||
Amortization of bond premium (discount), net |
4,505 | 835 | ||||||
Deferred gain on retroactive reinsurance |
(205,176 | ) | (40,117 | ) | ||||
Changes in: |
||||||||
Accrued investment income |
1,068 | (1,646 | ) | |||||
Premiums receivable, net |
1,017 | (1,174 | ) | |||||
Other assets |
2,963 | 19,817 | ||||||
Unpaid loss and loss adjustment expenses, net of reinsurance |
196,915 | (40,233 | ) | |||||
Reinsurance recoverable on paid losses and loss adjustment expenses |
39,255 | 86,711 | ||||||
Reinsurance balances payable |
(25,259 | ) | (13,201 | ) | ||||
Accounts payable and other accrued expenses |
(1,026 | ) | (3,986 | ) | ||||
Accrued interest payable |
7,093 | (7,535 | ) | |||||
Other liabilities |
(15,561 | ) | (4,171 | ) | ||||
Federal income tax payable / receivable |
(854 | ) | (1,526 | ) | ||||
Funds held from reinsurers |
(79,456 | ) | (14,048 | ) | ||||
Net cash from (used in) operating activities |
92,194 | (36,351 | ) | |||||
Cash (used in) from investing activities: |
||||||||
Proceeds from sale of fixed maturities |
367,869 | 96,171 | ||||||
Proceeds from calls, prepayments, and maturity of fixed maturities |
155,734 | 78,253 | ||||||
Purchase of fixed assets |
(1,628 | ) | (2,508 | ) | ||||
Purchase of fixed maturities |
(560,899 | ) | (347,387 | ) | ||||
Net sales and purchases of short term investments |
(66,997 | ) | 223,276 | |||||
Net cash (used in) from investing activities |
(105,921 | ) | 47,805 | |||||
(Decrease) increase in cash and cash equivalents |
(13,727 | ) | 11,454 | |||||
Cash and cash equivalents, beginning of year |
20,197 | 8,743 | ||||||
Cash and cash equivalents, end of year |
$ | 6,470 | 20,197 | |||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for interest on surplus notes |
$ | | 17,000 | |||||
Federal income taxes paid |
984 | 1,640 |
See accompanying notes to consolidated financial statements.
5
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(1) | Organization | |
The Consolidated Financial Statements represent the consolidated results of Clarendon National Insurance Company (National) and its insurance subsidiaries: Clarendon America Insurance Company (America); Harbor Specialty Insurance Company (Harbor) and Clarendon Select Insurance Company (Select), collectively, the Company. National, America and Harbor are domiciled in New Jersey, and Select is domiciled in Florida. National is a wholly owned subsidiary of Clarendon Insurance Group, Inc. (CIGI), a Delaware holding corporation. CIGI is a wholly owned subsidiary of Hannover Finance, Inc. (HFI), a Delaware holding corporation. HFIs parent is Hannover Ruckversicherung Aktiengesellschaft (Hannover Re), a German company. On July 12, 2011, after approval was received from the New Jersey Department of Banking and Insurance, Clarendon Holdings Group, Inc (CHG) completed the purchase of the entire share capital of National from CIGI. CHG is an indirect wholly owned subsidiary of Enstar Group Limited. | ||
Until July 1, 2005, the Company primarily wrote personal and commercial automobile liability and physical damage, workers compensation, and homeowners insurance and reinsurance in the United States of America. The Company was put into run-off on July 1, 2005 by HFI. National is licensed to write insurance in 50 states and the District of Columbia. America is licensed as an admitted carrier in the states of Delaware and New Jersey, and is eligible to write excess and surplus lines insurance in 42 other states and the U.S. Virgin Islands. Harbor is licensed to write property and liability insurance in 21 states and is domiciled in New Jersey. Select is licensed to write property and liability insurance in two states and is domiciled in Florida. | ||
(2) | Summary of Significant Accounting Policies |
(a) | Basis of Presentation | ||
Basis of preparation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The major estimates reflected in the Companys financial statements include, but are not limited to, the reserves for losses and loss adjustment expenses and reinsurance balances receivable. | |||
Basis of consolidation The consolidated financial statements include the assets, liabilities and results of operations of the Company and its subsidiaries as of and for the years ended December 31, 2010 and 2009. Intercompany transactions between National, America, Harbor and Select are eliminated on consolidation. | |||
Subsequent event The effect of material subsequent events or transactions that provide additional evidence with respect to conditions existing at the date of the balance sheet are recognized in the consolidated financial statements. Material events or transactions that provide evidence with respect to conditions that did not exist at the balance sheet date, but arose after that date, are disclosed in the notes to the consolidated financial statements. All events occurring subsequent to December 31, |
(Continued)
6
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
2010 through September 20, 2011, the date the financial statements were issued, have been evaluated. | |||
(b) | Cash and cash equivalents | ||
The Company considers all highly liquid debt instruments purchased with an initial maturity of ninety days or less to be cash and cash equivalents. | |||
(c) | Investments | ||
i) Short-term investments Short-term investments comprise securities with a maturity greater than ninety days but less than one year from the date of purchase. Short-term investments are carried at cost, which approximates fair value. | |||
ii) Fixed maturities Debt securities classified as held-to-maturity investments are carried at purchase cost adjusted for amortization of premiums and discounts. Debt investments classified as trading securities are carried at fair value, with realized and unrealized holding gains and losses included in net earnings and reported as net realized and unrealized gains and losses. Debt securities classified as available-for-sale are carried at fair value, with unrealized gains and losses excluded from net earnings and reported as a separate component of accumulated other comprehensive income. Amortization expenses derive from the difference between the nominal value and purchase cost and they are spread over the time to maturity of the debt securities using an effective yield method. Realized gains and losses on the sale of investments are based upon specific identification of the cost of investments. For mortgage-backed and asset backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised on a regular basis. | |||
iii) Preferred stock - The Company reports perpetual preferred stock at fair value, with changes in fair value reflected as unrealized gain or loss, charged or credited to income. | |||
(d) | Premium Revenue | ||
Premiums written are earned ratably over the term of the policy. Premium adjustments are estimated when estimable and adjustments are reflected in the period of change. The liability for unearned premiums represents the premiums applicable to the unexpired portion of the policy term as of the date of the balance sheet. Reinsurance premium ceded is charged against income ratably over the life of the contract. For retroactive reinsurance contracts, reinsurance premiums ceded are charged against income when paid. | |||
(e) | Losses and Loss Adjustment Expenses | ||
The liability for loss and loss adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on historical loss experience and industry statistics, for losses incurred but not reported. These estimates are continually reviewed and are necessarily subject to the impact of future changes in such factors as claim severity and frequency. While management believes that the amount is adequate, the ultimate liability may be significantly in excess of, or less than, the amounts provided. Adjustments will be reflected as part of net increase or reduction in loss |
(Continued)
7
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
and loss adjustment expense liabilities in the periods in which they become known. Premium and commission adjustments may be triggered by incurred losses and any amounts are reflected in net loss and loss adjustment expense liabilities at the same time the related incurred loss is recognized. |
The Company establishes provisions for loss adjustment expenses relating to run-off costs for the estimated duration of the run-off. These provisions are assessed at each reporting date and provisions relating to future periods are adjusted to reflect any changes in estimates of the periodic run-off costs or the duration of the run-off. Provisions relating to the current period together with any adjustments to future run-off provisions are included in loss and loss adjustment expenses in the consolidated statements of earnings. |
(f) | Federal Income Taxes |
National and its subsidiaries file a consolidated federal corporate income tax return with HFI and participate in a tax sharing agreement whereby National and its subsidiaries pay its respective share of the federal income tax based on a separate return calculation. Federal income taxes are recorded as an expense when payable to HFI. Current year federal income tax expense is based on financial reporting income or loss adjusted for certain permanent and timing differences. The timing differences are the result of dissimilar financial reporting and tax basis accounting methods. Deferred income taxes are provided based on an asset and liability approach, which requires the recognition of income tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of assets and liabilities at enacted tax rates. The Company establishes a valuation allowance for any portion of the deferred tax asset that management does not believe is more likely than not realizable. |
The Company has adopted the provisions of FASB ASC 740 relating to accounting for uncertainty in income taxes (formerly FASB Interpretation No. 48, commonly known as FIN 48) beginning in the financial year ended December 31, 2009. No adjustments have been recognized in the Companys consolidated financial statements as a result of the implementation. FASB ASC 740 requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Companys accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required in the consolidated statement of operations. As of and for the years ended December 31, 2010 and 2009, no liability for unrecognized tax benefits was recorded; therefore, no interest and penalties related to unrecognized tax benefits were recognized. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months. |
(g) | Commissions and Other Acquisition Costs |
Acquisition costs are costs that are incurred in the acquisition of new and renewal insurance contracts, and include those costs that vary with and are primarily related to the acquisition of insurance contracts. Acquisition costs primarily include agent commissions, premium taxes and an |
(Continued)
8
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(In thousands)
allocation of general and administrative expenses. These costs are deferred and limited to their estimated realizable value based on the related unearned premiums, anticipated loss and loss adjustment expenses, and anticipated investment income. These costs are amortized ratably over the terms of the related contracts. |
Ceded reinsurance commissions are earned as the underlying ceded reinsurance premiums are written, consistent with the recognition of gross acquisition expenses. If the ceded commission received under a reinsurance agreement exceeds the anticipated acquisition cost of the business ceded, a liability is established equal to the difference between the anticipated acquisition cost and the reinsurance commissions received. This liability is amortized on a pro rata basis over the life of the reinsurance agreement. At December 31, 2010, no liability was required to be recorded. |
Many of the Companys agency agreements and reinsurance agreements contain provisions for profit sharing commissions. Profit sharing commissions can increase or decrease total commissions, depending upon the underlying performance of the business written or ceded. Performance is typically measured by estimating ultimate loss ratios. |
(h) | Accounting and Reporting for Reinsurance |
The Company reviews the contractual terms of all reinsurance arrangements to ensure that all reinsurance contracts are properly given prospective, retroactive or deposit accounting treatment in accordance with GAAP. Contracts that do not result in the reinsurer assuming significant insurance risk under the reinsured portions of the underlying insurance contracts, and where there is not a reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed, generally do not meet the conditions for reinsurance accounting and must be accounted for as deposits. |
The Company has certain retroactive reinsurance contracts with Hannover Re. As such, adverse loss development subsequent to the inception of the contract is generally deferred and recognized in income over the settlement period, using the recovery method. Changes in the estimated recoveries produce changes in the periodic income recognized. These changes are determined retrospectively and included in income in the period of the change and subsequent periods. |
To the extent that the Companys reinsurance contracts contain mandatory commutation provisions, reinsurance recoverables for unpaid losses and loss adjustment expenses are adjusted to reflect the probable commutation settlement amount, which typically approximates the reinsurance reserves, discounted based on the expected claim payout pattern, to reflect the expected reinsurance recovery. |
(3) | Securities on Deposit and Restricted Assets |
At December 31, 2010, bonds with a carrying value of $173,047 were on deposit with various state insurance departments. Of the amount on deposit, $153,920 relates to deposits for California at December 31, 2010. These deposits mainly relate to workers compensation business and are based on the Companys gross workers compensation loss and loss adjustment expense reserves as of December 31, 2010 and 2009. The Company is restricted from selling these securities and maintains these deposits in accordance with California Department of Insurance regulations. |
(Continued)
9
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(4) | Investments |
The fair value of investments in fixed maturities and preferred stock at December 31, 2010 and 2009 are as follows: |
2010 | 2009 | |||||||
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |
$ | 275,010 | 151,258 | |||||
States and political subdivisions |
27,297 | 50,798 | ||||||
U.S. Special revenue and assessments |
26,296 | 108,567 | ||||||
All other governments |
7,721 | 16,307 | ||||||
Industrial and miscellaneous |
261,116 | 224,845 | ||||||
Mortgage/asset-backed securities |
46,969 | 47,338 | ||||||
Preferred stock |
4,824 | 4,075 | ||||||
$ | 649,233 | 603,188 | ||||||
The fair value hierarchy established by ASC 820, prioritizes valuation technique inputs to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The Company categorizes investments recorded at fair value as follows: | ||
Level 1 Unadjusted quoted prices accessible in active markets for identical assets or liabilities at the measurement date. | ||
Level 2 Unadjusted quoted prices for similar assets or liabilities in active markets or inputs, other than quoted prices, that are observable or that are derived principally from, or corroborated by, observable market data through correlation or other means. | ||
Level 3 Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. |
(Continued)
10
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(In thousands)
The following table represents, as of December 31, 2010, the carrying values of the Companys trading investments measured at fair value on a recurring basis: |
December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Available for sale investments: |
||||||||||||||||
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |
$ | | 275,010 | | 275,010 | |||||||||||
States and political subdivisions |
| 27,297 | | 27,297 | ||||||||||||
U.S. Special revenue and assessments |
| 26,296 | | 26,296 | ||||||||||||
All other governments |
| 7,721 | | 7,721 | ||||||||||||
Industrial and miscellaneous |
| 261,116 | | 261,116 | ||||||||||||
Mortgage/asset-backed securities |
| 46,969 | | 46,969 | ||||||||||||
Preferred stock |
| 4,824 | | 4,824 | ||||||||||||
$ | | 649,233 | | 649,233 | ||||||||||||
The following table represents, as of December 31, 2009, the carrying values of the Companys trading investments measured at fair value on a recurring basis: |
December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Available for sale investments: |
||||||||||||||||
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |
$ | | 151,258 | | 151,258 | |||||||||||
States and political subdivisions |
| 50,798 | | 50,798 | ||||||||||||
U.S. Special revenue and
assessments |
| 108,567 | | 108,567 | ||||||||||||
All other governments |
| 16,307 | | 16,307 | ||||||||||||
Industrial and miscellaneous |
| 224,845 | | 224,845 | ||||||||||||
Mortgage/asset-backed securities |
| 47,338 | | 47,338 | ||||||||||||
Preferred stock |
| 4,075 | | 4,075 | ||||||||||||
$ | | 603,188 | | 603,188 | ||||||||||||
(Continued)
11
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
The fair value of fixed maturities at December 31, 2010, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Fair | ||||
value | ||||
Due in one year or less |
$ | 62,227 | ||
Due after one through five years |
485,011 | |||
Due after five through ten years |
47,768 | |||
Due after ten years |
2,434 | |||
Mortgage/asset-backed securities |
46,969 | |||
$ | 644,409 | |||
Net investment income for the year ended December 31, 2010 and 2009 consists of:
2010 | 2009 | |||||||
Interest on Treasury securities and obligations of U.S. government corporations and agencies |
$ | 3,975 | 4,004 | |||||
Interest on other bonds |
13,917 | 14,091 | ||||||
Preferred stock |
262 | 276 | ||||||
Interest on cash and short-term investments |
239 | 588 | ||||||
Gross investment income |
18,393 | 18,959 | ||||||
Investment expenses |
(1,854 | ) | (2,185 | ) | ||||
Net investment income |
$ | 16,539 | 16,774 | |||||
Proceeds from sales of bonds during 2010 and 2009 were $367,869 and $96,171, respectively. Net
realized gains and losses from invested assets for the year ended December 31, 2010 and 2009 were
comprised of the following:
2010 | 2009 | |||||||
Bonds: |
||||||||
Gross gains |
$ | 16,467 | 1,234 | |||||
Gross losses |
(194 | ) | (282 | ) | ||||
Net realized investment gain |
16,273 | 952 | ||||||
Net unrealized gain/ (losses) on trading securities held at reporting date |
(3,019 | ) | 3,563 | |||||
Total net realized and unrealized investment gain |
$ | 13,254 | 4,515 | |||||
(Continued)
12
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(5) | Due to/from Parent and Affiliates | |
The Company had amounts due from (to) affiliates as of December 31, 2010 and 2009 as follows: |
Affiliate | 2010 | 2009 | ||||||
Hannover Finance, Inc. |
439 | 33 | ||||||
Hannover Services USA |
4 | 10 | ||||||
Hannover Re |
| (510 | ) |
For 2010 and 2009, the majority of the balances relate to the allocation of overhead expense. Please refer to note 15 regarding other related party transactions. | ||
In addition, the Company had a receivable from HFI of $417 at December 31, 2010 and a payable to HFI of $437 at December 31, 2009, for federal income tax payments. |
(6) | Fixed Assets | |
A summary of the components of fixed assets as of December 31, 2010 and 2009 is as follows: |
Accumulated | Carrying | |||||||||||
Assets | Cost | depreciation | value | |||||||||
2010: |
||||||||||||
Data processing equipment |
$ | 8,225 | (2,931 | ) | 5,294 | |||||||
Furniture and fixtures |
32 | (26 | ) | 6 | ||||||||
Leasehold improvements |
50 | (41 | ) | 9 | ||||||||
$ | 8,307 | (2,998 | ) | 5,309 | ||||||||
2009: |
||||||||||||
Data processing equipment |
$ | 6,597 | (1,361 | ) | 5,236 | |||||||
Furniture and fixtures |
32 | (18 | ) | 14 | ||||||||
Leasehold improvements |
50 | (31 | ) | 19 | ||||||||
$ | 6,679 | (1,410 | ) | 5,269 | ||||||||
The Company depreciates data processing equipment on a straight-line basis over a three-year period. The Company depreciates Furniture and Fixtures and Leasehold Improvements on a straight-line basis over a five-year period. For the years ended December 31, 2010 and 2009, the Company recorded depreciation expense of $1,588 and $828, respectively. |
(7) | Federal Income Taxes | |
The Company files a consolidated federal tax return with its ultimate parent company, Hannover Finance Inc, and affiliates including Clarendon Insurance Group Inc., Clarendon National Insurance Company, Clarendon America Insurance Company, Harbor Specialty Insurance Company, Clarendon Select |
(Continued)
13
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
Insurance Company, Clarendon Services of New Jersey, Inc., Clarendon Group Services, Inc., and
Atlantic Capital Corporation.
The method of tax allocation between companies is based on a written intercompany tax allocation
agreement, approved by the Board of Directors. The federal income tax provision is allocated to
each of the insurance companies in the consolidated group on a separate tax return basis.
There are no temporary differences for which deferred tax liabilities are not recognized.
The components of income tax expense for 2010 and 2009 are as follows:
2010 | 2009 | |||||||
Current tax expense/(benefit) |
$ | 130 | 67 | |||||
Deferred tax expense/(benefit) |
| | ||||||
Total expense/(benefit) |
$ | 130 | 67 | |||||
The tax effects of temporary differences that give rise to significant portions of the deferred tax
asset and liabilities as of December 31, 2010 and 2009 are as follows:
2010 | 2009 | |||||||
Deferred income tax assets: |
||||||||
Unearned premiums |
$ | 2 | 5 | |||||
Capital losses |
| 3,353 | ||||||
Accrued compensation |
1,836 | 1,251 | ||||||
Interest on surplus note |
18,316 | 15,833 | ||||||
Discounting of unpaid losses |
26,463 | 19,781 | ||||||
Provision for doubtful accounts |
12,573 | 15,085 | ||||||
Alternative minimum tax credit |
341 | 211 | ||||||
Net operating losses |
160,483 | 155,996 | ||||||
Deferred gain on retroactive reinsurance |
| 71,811 | ||||||
Other |
| 136 | ||||||
Total deferred tax assets |
220,014 | 283,462 | ||||||
Deferred income tax liabilities: |
||||||||
Deferred Acquisition Costs |
(2 | ) | (53 | ) | ||||
Unrealized gains on trading securities |
(1,143 | ) | (2,199 | ) | ||||
Other |
(3,038 | ) | (3,006 | ) | ||||
Total deferred tax liabilities |
(4,183 | ) | (5,258 | ) | ||||
Valuation allowance |
(215,831 | ) | (278,204 | ) | ||||
Net deferred tax assets |
$ | | | |||||
(Continued)
14
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
Since the Company is in run-off, management believes that it is more likely than not that the
entire gross deferred tax asset will not be realized, a valuation allowance has been provided on
the entire deferred tax asset.
The differences between the expected federal income tax expense (benefit) computed at the statutory
federal rate of 35% and the actual federal income tax expense (benefit) are as follows:
2010 | 2009 | |||||||
Income (loss) before taxes |
$ | 178,506 | (12,323 | ) | ||||
Tax benefit (expense) computed at 35% |
62,477 | (4,313 | ) | |||||
Non-deductable expenses |
26 | 36 | ||||||
Other |
| (2,897 | ) | |||||
Valuation allowance |
(62,373 | ) | 7,241 | |||||
Income tax expense |
130 | 67 | ||||||
As of December 31, 2010 and 2009, the Company has net operating loss carryforwards of
$458,523 and $445,703 respectively, both expiring between 2024 and 2030, originated between
2004 and 2010.
As of December 31, 2010 and 2009, the Company has net capital loss carryforwards of $0 and
$9,580, respectively.
As of December 31, 2010 and 2009, the Company has an alternative minimum tax credit of $341
and $211, respectively, which does not expire.
The Company has adopted the provisions of FASB ASC 740-10 relating to accounting for
uncertainty in income taxes (formerly FASB Interpretation No. 48, commonly known as FIN 48).
No adjustments have been recognized in the Companys financial statements as a result of the
implementation. FASB ASC 740 requires that an entity recognizes in the consolidated financial
statements the impact of a tax position, if that position is more likely than not of being
sustained upon examination, based on the technical merits of the position. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in which the
change in judgment occurs. The Companys accounting policy is to accrue interest and
penalties related to uncertain tax positions in the consolidated statements of operations. As
of and for the year ended December 31, 2010 and 2009, no interest and penalties related to
unrecognized tax benefits were recognized. In addition, the Company does not expect that the
amount of unrecognized tax benefits will change significantly within the next 12 months. The
Companys federal tax returns remain subject to tax examinations for 2007 and subsequent
years.
(Continued)
15
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(8) | Direct Premium Written | |
The Company does not have significant direct written premiums as the Company is in run-off and is only writing forced renewals. | ||
(9) | Reinsurance | |
The Company ceded business on both a pro rata and excess of loss basis to other reinsurers. Reinsurance does not relieve the Company of its primary obligation to its insureds, therefore the Company reviews the creditworthiness of each reinsurer on an ongoing basis. | ||
The effect of the Companys reinsurance on premiums written and earned (including cessions with affiliates) for the year ended December 31, 2010 and 2009 is as follows: |
2010 | 2009 | |||||||
Premiums written: |
||||||||
Direct |
$ | 4,065 | 354 | |||||
Assumed |
42 | 7,425 | ||||||
Ceded |
(9,886 | ) | (8,519 | ) | ||||
Net premiums written |
$ | (5,779 | ) | (740 | ) | |||
Premiums earned: |
||||||||
Direct |
$ | 4,707 | 652 | |||||
Assumed |
89 | 7,773 | ||||||
Ceded |
(10,532 | ) | (8,783 | ) | ||||
Net premiums earned |
$ | (5,736 | ) | (358 | ) | |||
The following amounts arising under reinsurance agreements (including cession with affiliates) have been deducted in arriving at the amounts reflected in the accompanying consolidated financial statements: |
2010 | 2009 | |||||||
Reserve for losses and loss adjustment expenses |
$ | 1,258,270 | 1,684,083 | |||||
Unearned premiums |
113 | 759 | ||||||
Losses and loss adjustment expenses incurred |
79,326 | 20,599 |
Effective July 1, 2005, National, America and Harbor, entered into an Adverse Development Cover reinsurance agreement (ADC) with Hannover Re. Under the terms of the agreement, the Company can recover $295,000 of losses in excess of the ultimate net liability on specific programs, as defined in the agreement. The transaction was reviewed and approved by the New Jersey Department of Banking and Insurance. The Companys expected ultimate net liability is $693,050 plus 75% of earned premiums ceded under the agreement. No losses were ceded under the agreement in 2010 and 2009. As a result of the approval of the loss portfolio commutation with Hannover Re discussed below, effective April 1, 2010, the Company amended the Adverse Development Cover reinsurance agreement with Hannover Re to include |
(Continued)
16
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
unlimited protection for failed reinsurance, disputed reinsurance, and any other
contingencies on two programs for which the uncapped coverage of the LPT would have
responded. The premium for this enhanced coverage was $5,000. This transaction was approved
by the New Jersey Department of Banking and Insurance. The Adverse Development Cover
reinsurance agreement was amended under sale on July 12, 2011. The agreement is accounted for
as retroactive reinsurance pursuant to ASC topic 944, as the agreement covers reinsurance
losses related to past incurred events covered by the underlying policies. As of December 31,
2010, no deferred gains were recorded related to this agreement.
On December 29, 2003, the Company entered into a loss portfolio transfer (LPT) agreement with
Hannover Re to cede approximately $199,726 of loss, loss adjustment expense and unearned
premium reserves for a consideration of equal value, resulting in no gain or loss. The New
Jersey Department of Banking and Insurance approved the agreement on February 23, 2004, to be
effective December 31, 2003. The agreement was accounted for as retroactive reinsurance in
accordance with provisions of ASC topic 944, as the agreement related to past incurred
events. The LPT had a cap of $350,000 for adverse development but also provided for unlimited
coverage on losses resulting from disputed and uncollectible reinsurance on the programs
covered by the LPT. Between 2003 and April 1, 2010, the Company ceded adverse loss
development and uncollectable reinsurance to the LPT of $706,162, which was deferred and
amortized into income over the settlement period using the recovery method. The LPT cap was
reached in 2009 and the Company retained $20,000 of incurred loss and loss adjustment
expenses for the year ended December 31, 2009, which were in excess of the cap. Amortization
of the deferred gain in 2009 was $40,117, and the unamortized gain as of December 31, 2009
was $205,176. In May 2010, the Company received approval from the New Jersey Department of
Banking and Insurance to commute the LPT effective April 1, 2010. The consideration received
was $245,947 representing the fair value of the subject ceded reserves (nominal) of $252,947,
resulting in a loss of $7,000 which was recorded as incurred losses in the statement of
operations. As a result of the commutation the Company amortized the remaining deferred gain
of $209,421on April 1, 2010 into income.
(Continued)
17
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
During 2010 and 2009, the Company engaged in reinsurance transactions with certain of its
affiliates. Premiums written, losses and loss adjustments expenses incurred, unearned premiums, and
the reserve for losses and loss expenses related to such transactions (including the LPT and ADC)
and included in the accompanying consolidated financial statements for 2010 and 2009 are as
follows:
2010 | 2009 | |||||||
Assumed: |
||||||||
Losses and loss adjustment expenses incurred |
$ | (3,032 | ) | (3,381 | ) | |||
Reserve for losses and loss adjustment expenses |
34,248 | 43,869 | ||||||
Ceded: |
||||||||
Premiums written |
$ | 7,146 | 2,812 | |||||
Losses and loss adjustment expenses incurred |
(5,409 | ) | 21,116 | |||||
Unearned premiums |
| 517 | ||||||
Reserve for losses and loss adjustment expenses |
89,020 | 382,429 |
At December 31, 2010, the Company had recoverables exceeding 3% of the Companys reinsurance
recoverable balance with the following reinsurers:
Total | Net unsecured | |||||||
recoverables | recoverables | |||||||
Praetorian Insurance Company |
$ | 253,075 | 86,363 | |||||
John Hancock Life Ins Company |
122,475 | 122,475 | ||||||
Hannover Ruckversicherungs AG |
90,669 | 90,669 | ||||||
Lincoln National Life Insurance Company |
78,544 | 46,316 | ||||||
Everest Reinsurance Company |
77,855 | 77,855 | ||||||
Berkley Insurance Co. |
56,503 | 56,503 | ||||||
Transatlantic Reinsurance Co. of NY |
43,224 | 43,224 | ||||||
Federal Insurance Company |
39,699 | 39,699 | ||||||
$ | 762,044 | 563,104 | ||||||
As of December 31, 2010, Hannover Re provided the Company with letters of credit issued by a third
party financial institution, totaling approximately $40,423 guaranteeing reinsurance recoverables
from certain unauthorized reinsurers. As of December 31, 2010, $5,238 out of $40,423 was utilized.
On July 12, 2011, the Hannover Re blanket coverage was cancelled.
During 2010, the Company commuted several ceded reinsurance contracts with various reinsurers. The
consideration received from reinsurers on commutations was accounted for as a reduction of ceded
losses and loss adjustment paid and results in increase in the net liability for unpaid losses and
loss adjustment expense. The Company discharged all present and future obligations between these
reinsurers and the Company related to these reinsurance agreements.
(Continued)
18
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
As a result of commutations in 2010, the Company recognized a loss of $12,063, summarized as
follows:
Projected | Projected | Amount | ||||||||||||||||||||||
losses | LEA | Premium | received | |||||||||||||||||||||
Reinsurer | incurred | incurred | earned | Other | (paid) | (Gain)/ loss | ||||||||||||||||||
Florida Hurricane Cat Fund |
$ | 435 | | | | 405 | 30 | |||||||||||||||||
Hannover Re |
225,825 | 29,042 | (290 | ) | (1 | ) | 247,501 | 7,075 | ||||||||||||||||
LDG Pool |
(28 | ) | 7 | | | 139 | (160 | ) | ||||||||||||||||
Lincoln National Life Ins Co. |
9,536 | 162 | | | 7,827 | 1,871 | ||||||||||||||||||
Lloyds |
5,346 | | (552 | ) | | 3,831 | 963 | |||||||||||||||||
Sinser Insurance Limited |
279 | | (11 | ) | (606 | ) | (9 | ) | (329 | ) | ||||||||||||||
Swiss Re (GE Re) |
399 | 4 | | | 267 | 136 | ||||||||||||||||||
Swiss Re (Life Re) |
5,319 | 108 | | | 4,274 | 1,153 | ||||||||||||||||||
Transatlantic Re |
3,345 | | | | 2,578 | 767 | ||||||||||||||||||
White Mountain |
2,039 | | | | 1,482 | 557 | ||||||||||||||||||
Total |
$ | 252,495 | 29,323 | (853 | ) | (607 | ) | 268,295 | 12,063 | |||||||||||||||
(10) Reserve for Losses and Loss Adjustment Expenses
Activity in the reserve for losses and loss adjustment expenses as of December 31, 2010 and
2009 is summarized as follows:
2010 | 2009 | |||||||
Gross reserves at beginning of the year |
$ | 2,028,337 | 2,533,977 | |||||
Less reinsurance receivables unpaid losses and loss
expenses at beginning of year |
1,683,931 | 2,149,337 | ||||||
Net reserves at beginning of year |
344,406 | 384,640 | ||||||
Incurred related to: |
||||||||
Current year |
418 | 219 | ||||||
Prior years |
19,942 | 32,849 | ||||||
Total incurred |
20,360 | 33,068 | ||||||
Paid related to: |
||||||||
Current year |
100 | 40 | ||||||
Prior years |
(176,655 | ) | 73,262 | |||||
Total paid |
(176,555 | ) | 73,302 | |||||
Net reserves at end of year |
541,321 | 344,406 | ||||||
Plus reinsurance receivables unpaid losses and loss
expenses at end of year |
1,246,839 | 1,683,931 | ||||||
Gross reserves at end of year |
$ | 1,788,160 | 2,028,337 | |||||
(Continued)
19
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
The Companys losses and losses adjustment expense reserves represent managements best estimate and is based on available information including an analysis prepared by the Companys actuary. While management believes the liabilities for losses and loss adjustment expenses are adequate to cover the ultimate liability, the actual ultimate loss costs may vary from amounts previously recorded. |
The 2010 prior year increase of $19,942 is due to the commutation of the LPT reinsurance contract of $7,000, allocation of overhead claim costs and net adverse development mainly from workers compensation and construction defect losses. The 2009 prior year increase of $32,849 is due to the loss development in workers compensation, commercial multi peril, personal auto liability and commercial auto liability lines of business. |
(11) | Premium Tax and Assessments |
The Company records an estimated premium tax accrual based on its direct written premiums. The Company also remits estimated payments as calculated by the various state tax authorities. In 2010 and 2009 the estimated tax payments required by the various states exceeded the Companys overall premium tax liability resulting in a premium tax asset of $13 and $100, respectively. |
The Company is periodically assessed amounts from states for guaranty funds and other fund assessments. A portion of these assessments are considered recoverable from the policyholders. Historically, the Company recorded a receivable to the extent such assessments were recoupable from policyholders. As the Company is currently in run-off and has limited ability to recover recoupable assessments from its policyholders, the Company expenses assessments as incurred. |
During 2010 and 2009, the Company recorded $(420) and $(2,782), respectively, of assessment expense that includes both recoupable and nonrecoupable assessments, net of recoveries. The Company routinely reviews its potential assessment liabilities and establishes an appropriate accrual, when required. As of December 31, 2010 and 2009, the Company reported no liability for assessments as a reasonable estimate of its obligation could not be determined. |
(12) | Notes Payable |
On December 20, 2000, National entered into a $100,000 subordinated surplus note with HFI. Principal is payable subject to the approval of the Commissioner, in twenty equal annual installments of $5,000 commencing on December 20, 2001. The interest rate is based on six-month London Interbank Offered Rate plus a margin of 1.5%. Interest is accruable and payable subject to the approval of the Commissioner, semiannually beginning with July 1, 2001. At December 31, 2010, total interest and principal due to HFI, but not yet approved by the Commissioner, amounted to $16,005 and $50,000, respectively. During 2010, interest and principal approved by the Commissioner and paid to HFI amounted to $0 and $0, respectively. During 2009, interest and principal approved by the Commissioner and paid to HFI amounted to $6,659 and $0, respectively. Total inception to date interest and principal paid to HFI, and approved by the Commissioner, amounted to $29,416 and $0, respectively. |
On December 20, 2002, National entered into a $82,563 subordinated surplus note with Hannover Re. Principal is payable; subject to the approval of the Commissioner, in sixteen equal installments of $5,160 commencing on December 20, 2003. The interest rate is based on the six-month London Interbank Offered |
(Continued)
20
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
Rate plus a margin of 1%. Interest is accruable and payable, subject to the approval of the
Commissioner, semiannually in arrears beginning with July 1, 2003. At December 31, 2010,
interest and principal due to Hannover Re but not yet approved by the Commissioner amounted
to $12,757 and $41,280, respectively. During 2010, interest and principal approved by the
Commissioner and paid to Hannover Re amounted to $0 and $0, respectively. During 2009,
interest and principal approved by the Commissioner and paid to Hannover Re amounted to
$3,966 and $0, respectively. Total inception to date interest and principal paid to Hannover
Re, and approved by the Commissioner, amounted to $12,819 and $0, respectively.
On December 21, 2004, National entered into an additional subordinated surplus note with
Hannover Re for $100,000. Principal is payable subject to the approval of the Commissioner,
in five equal installments of $20,000, commencing on December 21, 2005. The interest rate is
based on a six-month LIBOR note plus 300 basis points, with the rate changing on the 1st day
of each half-year. At December 31, 2010 interest and principal due to Hannover Re, but not
yet approved by the Commissioner was $23,568 and $100,000, respectively. During 2010,
interest and principal approved by the Commissioner and paid to Hannover Re amounted to $0
and $0, respectively. During 2009, interest and principal approved by the Commissioner and
paid to Hannover Re amounted to $6,374 and $0, respectively. Total inception to date interest
and principal paid to Hannover Re, and approved by the Commissioner, was $14,765 and $0,
respectively.
On February 25, 2011, National reached an agreement with Hannover Re and HFI to contribute
the surplus notes to capital in the amount of $282,563 plus accrued interest in the amount of
$53,360, which was recorded as additional paid-in capital. The contributions of all three
notes occurred in the first quarter of 2011. The agreement was approved by the New Jersey
Department of Banking and Insurance. National is released from any obligations to Hannover Re
and HFI as a result of the conversion of the notes.
(13) Regulatory Matters
The NAIC has developed a model law and risk-based capital formula designed to help regulators
identify property/casualty insurers that may be inadequately capitalized. Under the NAICs
requirements, an insurer must maintain total capital and surplus above a calculated threshold
or face varying levels of regulatory action. The authorized control level threshold of 200%
is based on a formula that attempts to quantify the risk of a companys insurance,
investment, and other business activities. At December 31, 2010, Nationals RBC level was
360.4%.
For Risk Based Capital purposes only, the Company has been granted a permitted practice by
the New Jersey Department of Banking and Insurance to offset reinsurance recoverables due
from Praetorian Insurance Company (PIC) by trust collateral pledged to the Company from PIC.
Effective July 1, 2005, the Company transferred most of the insurance business to PIC under
an indemnity agreement. This trust, in the amount of $153,206 (as of December 31, 2010), is
reflected in the Risk Based Capital Report Credit Risk for Receivables Column 2 Line 2.
During 2005, the Company entered into an agreement with the New Jersey Department of Banking
and Insurance (the Department) to, among other things, provide additional quarterly reporting
related to certain financial information. If the Company fails to materially comply with the
agreement, the Department has the right to take additional regulatory action. No regulatory
action has been taken to date.
(Continued)
21
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(14) Savings Plan
National sponsors a savings and profit sharing plan, the Clarendon National Insurance Company
Savings and Profit Sharing Plan (the Plan). Eligible employees may elect annually to
contribute 1% to 15% of their base pay on a pretax basis. The Plan became effective on April
1, 1997. Pretax contributions per employee were limited to $16.5 in 2010, in accordance of
Federal limitations. National matches pretax contributions in amounts up to 6% of each
eligible employees total compensation, as defined. Contributions are approved by the Board
of Directors in the subsequent year. In 2010 and 2009, the Company paid $519 and $581 for
savings plan and $564 and $579 for profit sharing plan, respectively, relating to the 2010
and 2009 plan years.
National sponsors a retention and severance plan where systematic, phased departures were
planned for March 31, 2008 (30% of base salary paid as retention), March 31, 2009 (40% of
base salary paid as retention) and March 31, 2010 (40% of base salary paid as retention) with
roughly 1/3 of the employees identified departing in each phase, subject to extension. Based
on the needs of the organization the headcount was not reduced by the planned 1/3, but rather
8 employees in 2010 and 15 employees in 2009. The severance component is based on a basic
formula of 2 weeks per year of service for nonofficer, 3 weeks for manager and AVP level, 4
weeks for VP level and 5 weeks for SVP level. The Company paid $116 as severance and $51
retention in 2010 (this included severance agreements outside of the plan which were
initiated during the year). As of December 31, 2010, Nationals accrued liability related to
the plan for severance and retention was $1,414 and $424, respectively.
(15) Other Related Party Transactions
The Company and HFI maintain an administrative agreement in connection with joint use of
operating and administrative services. The Company reimburses or is reimbursed for its
proportionate share of expenses under a formula based upon allocation of time. For the years
ended December 31, 2010 and 2009 HFI reimbursed the Company $308 and $283, respectively for
such services. The allocated cost is recorded as a receivable from HFI until reimbursed which
occurs within 45 days of being established.
(16) Commitments
In 2006, National entered into a five year operating lease to occupy office space, expiring
on September 30, 2011.
(Continued)
22
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
The aggregate minimum annual rental payments under various operating leases for office facilities
as of December 31, 2010 and 2009 are as follows:
Amount | ||||
Year ending December 31: |
||||
2011 |
$ | 1,188 | ||
2012 |
284 | |||
2013 |
215 | |||
2014 |
65 | |||
2015 |
| |||
Thereafter |
| |||
Total |
$ | 1,752 | ||
Rent expense for the years ended December 31, 2010 and 2009 was $2,139 and $2,265, respectively.
On April 29, 2011, the Company entered into a five year operating lease to occupy office
space, expiring on December 31, 2016.
The aggregate minimum annual rental payments under this lease are as follows:
Amount | ||||
Year ending December 31: |
||||
2011 |
$ | 132 | ||
2012 |
400 | |||
2013 |
412 | |||
2014 |
424 | |||
2015 |
437 | |||
Thereafter |
450 | |||
Total |
$ | 2,255 | ||
(Continued)
23
CLARENDON NATIONAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(In thousands)
(17) Contingencies
The Company is involved in various litigation and arbitration proceedings arising from
transactions conducted in the ordinary course of business. Management, after consultation
with legal counsel, believes the ultimate liability, if any, arising from such actions will
not materially affect the Companys financial position or results of operations.
Raydon Underwriting Management
An agent named Raydon Underwriting Management (Raydon) produced a book of business for
National and America during the 1990s that consists of coverage for self insurance funds,
retrocessional and primary workers compensation business and personal accident business. The
Company has specific reinsurance for this book of business that attaches at $10 per
occurrence. The Company also has reinsurance in place for the aggregate coverage Raydon
wrote.
Two purported cedents have notified the Company in writing of material amounts allegedly due
(or to become due) from the Company on the Raydon business. The Company is auditing such
cedents and, for a variety of reasons, has disputed the validity of the bills they have
presented.
The total gross amount of such disputed inward cessions (paid and case), on their face and
ignoring the Companys issues with their validity, equaled approximately $65,200 as of
December 31, 2010. The Company expects that it would eventually recover approximately $54,000
of this amount from the reinsurance protection it has for the Raydon program, leaving a net
of approximately $11,200 before the application of other reinsurance.
However, the issues that the Company has raised are such that it is very difficult for the
Company to estimate its actual gross or net exposure concerning such bills to a reasonable
degree of certainty. Notwithstanding this uncertainty, the Company has, based on information
it has obtained through its audits and its experience with resolving similar issues, recorded
a reserve of $19,100, net of reinsurance, to address the uncertainty, mentioned above, and
IBNR for development in the Raydon book.
Based on its aggregate reserve for net losses and loss expenses at December 31, 2010 and 2009
the Company does not expect that the net liabilities associated with the disputed Raydon
cessions will have a material adverse impact on its future liquidity or financial position.
Subsequent to December 31, 2010, the Company has entered into a
reinsurance agreement such that the Company no longer has a material
net exposure to the contingencies discussed in this note.
24